There is legitimately no legal difference in contract law between the words contract and agreement. These two legal terms are frequently used interchangeably to refer to a legally binding contract and/or agreement.
But most people are not aware that while an agreement can (and typically is) a legally enforceable and binding contract, it doesn’t have to be and sometimes isn’t.
In this post, I’m going to outline the main differences when it comes to determining whether you are entering into a legally enforceable contract vs. an unenforceable agreement.
Agreement vs Contract: The Key Difference
An agreement, also known as a “gentlemen’s agreement” is an informal agreement between two people or parties where they agree to how they will work together and what financial compensation will change hands.
Remember the scene in Jerry Maguire where Cush's Dad shakes hands with Jerry and says “I don't do contracts, but my word is stronger than oak”… and then promptly breaks the agreement and signs with another agency?
That was an unenforceable “handshake” agreement.
The primary difference between an unenforceable agreement and a legal contract is in terms of enforceability. By unenforceable, we mean that if one of the people that entered into the agreement decides to back out, they can’t be held liable for damages in a court of law.
It should be noted that the “breaching” party could still be sued, but if there is no legally enforceable contract, then the lawsuit will get dismissed.
In other words, Jerry Maguire could have sued Cushman, but the lawsuit would have been tossed.
Alternatively, with a legally valid contract, if one party breaks the agreement (also known as “breaching” the contract), the damaged party can bring a legal action for breach of contract in a court of law and receive monetary damages or equitable relief or both.
How do you know if you have an enforceable contract?
The 4 Essential Elements of a Valid Contract
In order to constitute an enforceable contract, a contract (or agreement) must include the following 4 key elements:
- Offer and Acceptance
- Consideration
- Capacity
- Legality (or legal purpose)
Offer and Acceptance
Frequently referred to as a meeting of the minds or mutual agreement, an offer and acceptance is required for a contract to be held enforceable. This means that one party or person must make an offer to the other party and the other party must accept that offer without altering the legal terms of the offer. Any alteration of the terms would be considered a rejection and “counter-offer”.
As an example, we are about to list our house for sale. We will list our house at a certain price. Any prospective buyer may make an offer at, below, or above our listing price. They may also include certain legal terms and conditions in their offer. If we sign their offer without changing it, then there is an offer and acceptance.
But if we make even the most minor of changes, then a new offer sheet or written contract will need to be drawn up and sent around for all parties to sign. (A real estate contract must be in writing or else it violates the statute of frauds and is unenforceable).
Another example is when one party sends another a “letter of intent”. This can happen when an entrepreneur decides to sell their business. Potential buyers will send a letter of intent as their offer. When the business owner is satisfied with the terms of the prospective sale, then they will countersign the letter of intent and thus the process of selling the business begins.
Legal Consideration
Consideration is often referred to as the contract price.
For there to be valid consideration, it must be reciprocal, meaning that there must be mutual obligation on the part of both parties to either give up a legal benefit (typically cash) or obligate themselves to fulfill a promise in exchange for financial consideration.
If only one party to the contract gives up a legal detriment, then the contract is deemed gratuitous and is unenforceable in most situations.
This is one reason why it is important to have a lawyer review your contracts or use a lawyer drafted legal template. I’ve seen more than my share of gratuitous contracts over the years that were offered to unsuspecting and naive individuals who didn’t realize that they were entering into an unenforceable contract.
Capacity
Both parties that enter into a contract must have the legal capacity to do so.
This means that both parties should have reached the proper legal age to enter into a contract, must be clear-headed and free of any mental defect, and must be capable of understanding the contract they are entering into.
Legal Purpose
You can’t enter a contract that is illegal. Contracts to sell illegal substances (such as drugs) or to commit a crime are illegal and unenforceable. This is because the contracts are void as against public policy. Consider the legal implications of allowing the courts to adjudicate breach of contract cases where the subject matter of the contract is illegal!
The best example of this is the drug dealer who thought it would be a good idea to sue the person that took their drugs to sell but never shared the profits. Believe it or not, this has happened.
Is Your Contract an Enforceable Agreement?
If you have entered into a contract with someone, but aren’t sure whether you have negotiated an enforceable agreement, review these four legal elements and determine whether your agreement would stand up in a court of law.
If there is mutual assent (i.e. a meeting of the minds that is shown through a valid offer and acceptance), if there is reciprocal legal consideration (i.e. one of you is paying something and the other is agreeing to perform a task or fulfill a promise), if both of you have the mental capacity to enter into an agreement and the purpose of the contract is legal, then chances are good that your agreement will be legally enforceable.
A Legally Enforceable Contract Does Not Need to Be in Writing
Many people wrongly think that a valid contract must be laid out in a written document. But this is not necessarily the case. Verbal contracts and oral agreements, provided that they don’t violate the statute of frauds, can also be enforceable agreements.
A good example of a verbal agreement would be the following.
Your yard needs mowing and some mulch. You see somebody working on your neighbor’s yard, and decide to walk up and ask them if they can mow your yard and add some mulch. They take a look and say sure thing, for $300 they will do it after they finish up your neighbor’s yard. You agree and they start working on your yard that afternoon. After they finish they ask you for payment. If you decide not to pay, they could sue you in court for breach of contract because all of the elements of a contract are met in this situation.
What Types of Contracts MUST be in Writing to Be Enforceable?
Each state has slightly different rules regarding what contracts must be in writing to be legally enforceable.
If you are interested in looking up the rules in your state, just do a search for “[Your State] Statute of Frauds” and you will find a list of the specific contracts that must be in writing.
The Statute of Frauds is a common law principle that states that, in general, the following contracts must be in writing to be legally binding and enforceable:
- Real Estate Transactions
- Purchase of goods exceeding $500
- Contracts that exceed one year
- Contracts where one person promises to pay the debt of another
This is one reason why we frequently recommend that online entrepreneurs who are selling courses that exceed $500 use our online terms of sale on the order page for their course or membership.
5 Essential Business Contracts
If you are going into business for yourself as an online entrepreneur or small business owner in the United States, you want to make sure that all of your business contracts are legally binding and enforceable.
Following are 5 essential business agreements that you should use in your online business.
Standard Contract for Services
If you intend to work as a freelancer or independent contractor and will be taking on clients, you want to make sure that you enter into a formal agreement with each and every person or business you intend to work with. This is frequently referred to as a professional services agreement.
By doing so, you will ensure that there is a mutual understanding between you and your clients as to what services you will perform and how much you will get paid to perform those services.
For a solid formal contract that you can use in your business, click here for our client services agreement.
Independent Contractor Agreement
Whereas the client services agreement is written from the perspective of the independent contractor, an independent contractor agreement is written from the perspective of you as the business owner.
This means that the legal terms and legal obligations of the independent contractor agreement will offer you more protection as a business owner than the standard client agreement would.
This agreement will outline what the contractor will do for you and how they will get paid, as well as whether you are ok with the contractor working with competing clients. In addition, this contract will spell out who will own the intellectual property that your contractor prepares in your business.
Click here for this independent contractor template agreement.
Privacy Policy
If you are just getting started with your online business, chances are you are building a website and trying to build an email list. And even if you aren’t building an email list, you may be trying to set appointments online with potential clients and are asking people to fill out a contact form on your website.
If you are doing any of these things, then you are legally required to have a valid Privacy Policy on your website. This is a policy document that states what information you are collecting, why you are collecting it, what you are permitted to do with the information, and how the individual submitting the information can ask you to purge their information from your database.
This is a document that is legally required in all 50 states if you are operating online, as well as in the European Union (via GDPR).
Click here to get a legally binding Privacy Policy today.
Website Agreement for the Sale of Goods
If you are selling products, including digital goods, online then you must have an agreement for the sale of goods.
This is because, under the statute of frauds as referenced above, a contract for the sale of goods that exceed $500 must be in writing.
Our recommendation is that you include a copy of this template, personalized for your business, on your checkout page so that the buyer of your course or membership may review your contract and will “check the box” indicating that they fully understand and agree to your contract terms.
This is just as important, if not moreso, if you are operating an online store where you are selling and shipping physical products that exceed $500 in value.
Non-Disclosure Agreement
A non-disclosure agreement is exactly what it sounds like. It is an agreement where one party agrees not to disclose the information of another party.
Frequently the legal consideration in these contracts is ongoing employment of one party by the other. But the enforceable promises contained in the agreement can last for a period of time after the employment relationship ends.
The common understanding in these agreements is that one party (typically the employer) will be injured or damaged if the employee or contractor discloses certain business practices, systems or trade secrets of the employer.
The legal consequences of breaching these agreements can include injunctive relief (i.e. the court ordering someone to stop certain behavior), or even financial damages or a sum of money as listed in the contract payable to the injured party.
Many of the agreements at One Stop Legal contain non-disclosure language within them. Notwithstanding, we frequently recommend that our clients have their employees and contractors sign a separate non-disclosure agreement so that there is no question about the intent of the parties entering into that agreement.
For a non-disclosure agreement that you can use immediately in your business, click here.
Common Mistakes People Make With Their Contracts
Whenever you are entering any type of business relationship with another business, an employee, a contractor, or even a client, you must have a written contract in place.
But many entrepreneurs will have a contract agreement in place, but still find themselves in legal jeopardy if something goes wrong. The following is a list of common mistakes people make when it comes to their legal documents (or lack thereof).
Not Having a Binding Agreement
Many entrepreneurs make the mistake of either not entering into a contractual relationship at all (i.e. assuming that there gentlemen’s agreements will suffice), or entering into a contract that is legally unenforceable because it lacks one of the main elements of a contract as outlined above, or else it violates the statute of frauds.
Entering an Unfair or Onerous Agreement
I can’t tell you how many times I have had consultations with entrepreneurs who are seeking advice about a contract they are thinking about entering into. I will read the contract and think to myself “why in the world would ANYONE sign this?”
And then I tell the client this, and in the heat of the moment they explain why it is such a great deal for them. But the fact of the matter is that the agreement is so one-sided in favor of the other party that if anything goes wrong they are likely to bankrupt themselves.
Any contracts that are incredibly difficult to get out of, or that would require a huge cash payment as an “exit fee” should be looked at with suspicion.
Signing a Contract that Lacks Specific Terms
The best contracts are easy to read, and contain very specific terms that are non-contradictory. This means that if you read one part of the contract it doesn’t conflict with another clause in the contract. Furthermore, a reasonable person would understand what the terms of the contract mean.
Unfortunately, many people cobble together contract agreements that they find online without fully comprehending what they are doing. When you do this, you will frequently cut and paste various clauses that don’t work together and make the contract as a whole confusing.
Worse than this are contracts that contain terms that are vague and non-specific. Some people do this because they want to make the contract sound better to the other party, or even to themselves. But in reality they are just creating a legal document that doesn’t do them or the other party any good because nobody knows what their true contractual obligations are.
How to Create a Great Contract Without Hiring a Lawyer
Using lawyer drafted and approved legal templates are a great way to insure that you have a rock-solid contract in place for a fraction of the price of hiring a lawyer.
At One Stop Legal, you can find a variety of legal agreements that will protect your online business. What specific type of agreement are you looking for?
